Some words are used so much that we forget to ask what they mean. One of these words is ‘innovation’. But what is innovation in the context of startups? What do we mean when we say: “they have an innovative product!” Or perhaps more frequently among investors “there is not enough innovation!”. I asked myself this question, and here is the answer.
Startups innovate. We all know that. But have you ever asked yourself what innovation really is?
After having witnessed hundreds of startups during the past decade I have finally realized what startup innovation is.
Startup innovation has two main components. Those are Novelty and Value. Put differently, innovation is really the outcome of mixing novelty and value.
Novelty is objective newness. Most founders have the urge to introduce something new to the world. To ensure eternal legacy by having been “the first”. Like Henry Ford’s first assembly line, Steve Jobs’ first smartphone or Elon Musk’s first reusable rocket. Sometimes novelty can be patented. Most often though founders just claim novelty.
Value is a subjective assessment by the customer. Most founders assume that their product is valuable. The reason is that value is subjective. And because the founders love their product, they also blindly assume the customer will.
Because innovation is the outcome of novelty and value, the level of innovation is a function of the individual levels of novelty and value. Both novelty and value come on a spectrum. A product can be more or less novel. Similarly, it can be more or less valuable.
Imagine novelty and value on two different axes. Then it would look like the matrix below. I call it the innovation matrix:
The matrix has four generic quadrants. The low left corner is the ‘low novel and low value’ quadrant. The top left corner is the ‘high novelty and low value’ quadrant. The top right corner is the ‘high novelty and high value’ quadrant.
Because innovation is a function of novelty and value. Any innovation can be defined by its place in the matrix. In this light, we now know what we mean by “a high degree of innovation”. What we mean is that the product has a high degree of novelty and the customer place a big value on it.
How does this help?
In my experience, different places in the innovation matrix define the main challenge of the startup.
Obviously, the main challenge for startups in the low left quadrant is to move out of this quadrant. I call it the ‘Pit of eternal pivoting. The reality is that a lot of startups are in this quadrant. They are attempting something that has already been tried multiple times, and they have not adequately developed customers and validated their value proposition.
These companies need to start talking to customers to understand how their products can be more valuable in the eyes of their customers. Also, they need to clearly position themselves in relation to their competitors. Often done by focusing on unique features and branding these.
For startups in the top left corner, the challenge is that they have made something that does on Kickstarter, but not anywhere else. I call it the gadget quadrant. The product has high novelty, but it does not solve a serious problem for anyone.
These companies quickly need to develop a product line of adjacent products that together will solve a bigger problem. Or find a niche customer segment who actually need it.
For startups in the top right corner, the challenge is that none understands what they do. I call it ‘New categories. Those who do understand are skeptical of the claims. It is almost too good to be true, and customers are wary and want lots of proof.
These companies need to produce expensive showcasing (Like the Tesla Roadster, test-flying a reusable rocket, going through clinical trials). The time and money required to verify these claims and educate the market is expensive. Consequently, the founders must learn the art of raising large sums of money.
For startups in the low right corner, the challenge is simple. To beat the competition. Often these startups face fierce competition because customers are willing to pay for this product or service. (think food delivery, scooter sharing, and CRM software).
These companies need to build a high-performance culture and headhunt the best managers. A big war chest to starve out competition also helps.
When evaluating startups, I mentally place them in this matrix, and it helps me understand the actual level of innovation, and how to best the help founder team based on the challenges imposed by their place in the Innovation Matrix. I hope it helps you as well.